FUND MANAGEMENT

A portfolio manager has many advantages that would qualify him as something of an insider.

portfolio managers have sources of information not generally available to the public and have the resources to analyze the information adequately.

Market maker

Individual standing ready in the Exchange to make a market in particular securities, that is, to supply liquidity to the market by buying or selling the securities at fair prices.

Specialists are market makers who conduct the market for the shares of various companies on the Exchange.

The many professional analysts employed by stockbrokers and their institutional clients are contributing to the efficiency of the market.

What is market equilibrium?

In equilibrium, stock prices are stable.

There is no general tendency for people to buy versus to sell.

The expected price, P, must equal the actual price, P. In other words, the fundamental value must be the same as the price.In equilibrium, expected returns mustequal required returns:

ks = D1/P0 + g = ks = kRF + (kM - kRF)b.

Why do stock prices change?

PD

k gi0

1

ki = kRF + (kM - kRF )bi could change. Inflation expectations Risk aversion Company risk

g could change.

^

Securities are normally in equilibrium and are “fairly priced.”

One cannot “beat the market”except through good luck or inside information.

•THE SMALL COMPANIES EFFECT

returns on shares have been inversely proportional to their market capitalizations

That is, smaller companies enjoy abnormally higher returns

This small companies effect attracted much research interest because it appeared to be inconsistent with market efficiency.

•Meaning of Capital StructureCapital structure refers to the kinds of securities and the proportionate amounts that make up capitalization.

It is the mix of different sources of long-term sources such as equity shares, preference shares, debentures, long-term loans and retained earnings.

FINANCIAL STRUCTURE

The term financial structure is different from the capital structure. Financial structure shows the pattern total financing. It measures the extent to which total funds are available to finance the total assets of the business.Financial Structure = Total liabilitiesOrFinancial Structure = Capital Structure + Current liabilities.

Financial StructuresCapital Structures

1 .It includes both long-term and short-term sources of funds

1 .It includes only the long-term sources of funds.

2 .It means the entire liabilities side of the balance sheet.

2 .It means only the long-term liabilities of the company.

3 .Financial structures consist of all sources of capital.

3 .It consist of equity, preference and retained earning capital.

4 .It will not be more important while determining the value of the firm

4 .It is one of the major determinations of the value of the firm

The following points indicate the difference between the financial structure and capital

structure.

Example

From the following information, calculate the capitalization, capital structure and financial structures.

LiabilitiesAssetsEquity share capital 50,000

Preference share capital 5,000

Debentures 6,000

Retained earnings 4,000

Bills payable 2,000 Debtors

Creditors 3,000

Fixed assets 25,000

Good will 10,000

Stock 15,000

Bills receivable 5,000

Debtors 5,000

Cash and bank 10,000

70,00070,000

Calculation of Capitalization

. Sources Amount

1 .Equity share capital 50,000

2 .Preference share capital 5,000

3 .Debentures 6,000

Capitalization 61,000

Calculation of Capital Structures

Sources

Equity share capital Preference share capital

Debentures

Retained earnings

50,000

5,000

6,000

4,000

76.92%

7.69%

9.23%

6.16%

65,000100%

Objectives of Capital StructureDecision of capital structure aims at the following two important objectives:

1 .Maximize the value of the firm.2 .Minimize the overall cost of capital.

Forms of Capital StructureCapital structure pattern varies from company to company and the availability of finance.

Normally the following forms of capital structure are popular in practice.

•Equity shares only. •Equity and preference shares only.

•Equity and Debentures only. •Equity shares, preference shares and debentures.

FACTORS DETERMINING CAPITAL STRUCTURE

The following factors are considered while deciding the capital structure of the firm.

1-Leverage

2-Government policy

3- Cost of Capital

the firm must take careful steps to reduce the cost of capital.)a (Nature of the business:

)b (Size of the company:

)c (Legal requirements:

)d (Requirement of investors: